ITAD BIR Ruling No. 291-12

July 17, 2012 ITAD BIR RULING NO. 291-12 Article 10 (Dividend), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 103-11 Manabat Sanagustin & Co. 9th Floor, The KPMG Center 6787 Ayala Avenue, Makati City Attention: Ms. Maria Carmela M. Peralta Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on December 14, 2011, on behalf of your client, UNILEVER PHILIPPINES, INCORPORATED ("Unilever Philippines") , requesting confirmation that dividends paid by Unilever Philippines to NEW ASIA B.V. ("New Asia") are subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that New Asia is a foreign corporation organized and existing under the laws of the Netherlands and is a resident of the Netherlands, based on its Articles of Association, and on the Declaration of Residence issued by the Tax and Customs Administration of Rivierenland/Kantoor Arnhem in the Netherlands on September 15, 2011; that New Asia has an authorized capital of 100,000.00 Euros which is divided into 100 ordinary shares of stock, each with a par value of 1 Euro; that New Asia is situated at 455 Weena A.L. Rotterdam, the Netherlands; that New Asia is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on September 22, 2011; and that, on the other hand, Unilever Philippines is a domestic corporation situated at 1351 United Nations Avenue, Philippines. It is further represented that the Board of Directors of Unilever Philippines, at its special meeting on December 8, 2011, declared cash dividends in the amount of P139,374,226.14 to its stockholders of record of Unilever Philippines as of September 30, 2011, and paid on December 20, 2011; and that since June 26, 2003 and up to present, New Asia holds 4,918,523 subscribed shares at a par value per share of P50.00 or a total of P245,926,150.00 which represent almost 100 percent of the total shares of Unilever Philippines. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certificate of No Pending Case issued by the National Finance Director of Unilever Philippines on October 4, 2011. aCcADT In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends payable to New Asia, a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as New Asia, the recipient of the dividends from Unilever Philippines, is a company in the Netherlands whose capital is wholly divided into shares, and since New Asia holds directly at least 10 percent (in fact, almost 100 percent) of the capital of Unilever Philippines, such dividends paid by Unilever Philippines to New Asia are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-103-11 dated April 4, 2011) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. HSTCcD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue